A primary residence turned into a rental property!
This episode is all about investment properties: what are they, how did we get started with our first rentals, and some rules of thumb that will help you when it comes to purchasing your own! After our last episode on Airbnb we knew we needed to address investment property broadly, as they’re a pillar of our future financial security. We’ll have more episodes where we’ll get more specific and discuss things like return on investment (ROI), insurance, and screening tenants. But for now, we’re just covering the basics. And at the beginning of this episode we cracked open an IPA – Scatterbrain by Bearded Iris Brewing which you can find and learn all about on Untappd. If you enjoyed this episode, be sure to subscribe and review us in iTunes, Stitcher, or wherever you get your podcasts!
As promised, here are some additional resources we’d love for you to check out:
- The Millionaire Real Estate Investor – by Gary Keller. Get this if you’re the academic type.
- Bigger Pockets – If you’re looking for ways to network with others and learn online, bookmark it. Not to mention they have an entire stable of online tools to check out.
- SmartMove – Joel and I have both used this site for years as a final check to screen our tenants.
And remember to keep the 1% rule in mind if you’re considering if a property would make a good rental – if you can pull in 1% of the property cost, in monthly rent, then it’s likely a good deal. However, if you really want to crunch the numbers and if you find comfort in data (like I do!), then here is a rental ROI spreadsheet that I use to figure out the exact numbers when considering a property for purchase.
If you found this episode helpful or if you thought it sucked, leave a comment below. We want to hear from you!
Cheers!
Question on the 1% rule: If you are considering renting out your home that you’ve been living in for a while, should the market rent be at least 1% of what the purchase price was, or at least 1% of what current market purchase price would be? For example, if my home cost $200,000 eight years ago, but now it would likely list for $300,000, what would the 1% rule tell you?
Hey Sara, awesome question! There are a lot of factors at play here, but I would say if you could pull 1% of the original purchase price in rent, then the numbers make sense to consider renting it. A more hardcore numbers purist might say that you need to be making 1% of the current value otherwise it’s not a good rental, but typically it takes some time for rent values to reflect home value increases (plus the demand just may not be there for rentals!).
What’s important to keep in mind in your example though (purchased at 200k, currently worth 300k, hopefully able to pull in ~2k/mnth), is that you have an investment property with a lot of idle equity sitting there in that one house. Assuming you put down 20% you might only owe about 130k so you have about 170k in equity!!! In a scenario like this, I would consider taking some of that money out (cash out refi, home equity loan, heloc), but ONLY if you were planning to invest it! If you think you might be tempted to spend it, then just leave it be! 🙂
That is a fantastic question, Sara. The market rent should be at or near 1% of the purchase price, not the current market value. This ensures a healthy margin between your monthly mortgage obligation and the rental income you will bring in.
Make sure to keep this in mind if you decide to rent out your primary residence – you’ll pay capital gains tax on the appreciation of your home if you rent it out for 2+ years. So, if you are going to make the plunge into becoming a landlord, make sure you are in it for the long haul (or the extremely short one-year haul). It would suck to decide you don’t like being a landlord after 3 years and then have to pay 15% tax on the appreciation of your home that you could have avoided by selling it now. Just something to consider. Good luck becoming a landlord!
Thank you so much for your very thoughtful responses! You both raise things that hadn’t occurred to me before but are helping me to consider my options. I’ve got a great condo in a location I love, so I’ve been waffling between staying, selling to move, or renting it out.
On a side note, I only recently discovered your podcast as I was watching a Clark Howard Facebook Live and either Joel or his co-worker mentioned it. I’m really enjoying all the Pour Not Poor episodes! You guys seem to have a nice balance between frugality and enjoying life, and your content resonates with me. Cheers!
If you love living in that condo what is making you consider potentially selling it?
Thanks a bunch for listening. Matt and I definitely strive for that balance and truly hope that it comes through in every episode and encourages others to pursue the same. Cheers!